In brief - Reports prepared for dominant purpose of providing advice in relation to litigation
In the matter of Ensham Resources Limited v AIOI Insurance Company Limited  FCA 710 (Ensham), the Federal Court of Australia has recently reaffirmed the circumstances which attract legal professional privilege in reports by loss adjusters. In Ensham the court found that legal professional privilege attached to the loss adjuster's reports, as it was satisfied that they were prepared for the dominant purpose of providing advice in relation to litigation (at ).
Further, the court found that the circumstances surrounding the claim could be recognised as highly conducive to litigation and that litigation was a real possibility in the minds of the solicitors when the loss adjuster was first being retained (at ).
Flooding causes significant damage to coal mine and interruption of business
During January 2008 there was heavy rainfall around the flood plain of the Nagoa River in Queensland. The Nagoa River and Old Winton Creek overflowed as a result, breaching levies surrounding various pits of a coal mine owned and operated by Ensham Resources Pty Ltd (Ensham). Ensham suffered significant damage to its property, as well as consequential business interruption.
On 22 January 2008, Ensham gave notice under its industrial special risk insurance policy (the policy) held with insurer AIOI Insurance Co Ltd (the insurer) of a potential claim. Ensham made claims under the policy between 18 August 2008 and 8 April 2010. The insurer did not make any payments under the policy and Ensham commenced proceedings to recover its loss.
Loss adjuster retained by insurer and then by insurer's solicitors
The insurer retained a loss adjuster to investigate the claim prior to retaining solicitors. The solicitors who were subsequently retained to provide legal advice recommended on 13 February 2008 that the insurer withdraw its retainer with the loss adjuster to enable the loss adjuster to be retained thereafter by the solicitors directly.
The solicitor's letter of retainer stated to the loss adjuster that the solicitor was instructed to give advice "in relation to the policy response and to deal with certain issues that... are likely to be contentious between the parties" (at ). The letter of retainer requested that the loss adjuster's report "deal with the circumstances giving rise to the claim, the damage suffered, the potential exposure of AIOI and the extent to which the Policy may respond to enable us to be in a position to provide advice to AIOI on the claim and indemnity issues" (at ).
Additionally, the letter stated that the matter could result in a "significant claim", and would likely "lead to a dispute over the extent to which the Policy responds", which was "likely to result in litigation" (at ).
Ensham applies to have all of the loss adjuster's reports produced
Discovery was ordered in relation to certain issues raised by the insurer's defence. One report of the loss adjuster was discovered. Ensham required all reports of the loss adjuster to be discovered. The insurer claimed legal professional privilege over nine reports, but privilege was ultimately maintained wholly or partially in respect of only five of the reports.
Ensham brought an interlocutory application to have all the reports by the loss adjuster produced.
Legal professional privilege and confidentiality of communications
In determining the interlocutory application, the court considered and reaffirmed the principles pertaining to legal professional privilege. The court noted the fundamental principle of legal professional privilege was to protect the confidentiality of communications, where those communications were made in connection with giving or obtaining legal advice or the provision of legal services which include representation in proceedings in court (at ; Esso Australia Resources v FCT (1999) 201 CLR 49 at ).
Litigation must be reasonably contemplated at the time document is produced
The court reiterated the principle that the party claiming privilege bears the onus of establishing that litigation was reasonably contemplated at the time the document was produced (at ; Nickmar Pty Ltd v Preservatrice Skandia Insurance Ltd (1985) 3 NSWLR 44 at 54; National Employers’ Mutual General Insurance Association Ltd v Waind (1979) 141 CLR 648; Trade Practices Commission v Sterling (1979) 36 FLR 244; Wheeler v Le Marchant (1881) 17 ChD 675).
The court stated that this is an objective question (at ; Nickmar Pty Ltd v Preservatrice Skandia Insurance Ltd (1985) 3 NSWLR 44 at 55; Grant v Downs (1976) 135 CLR 676 at [682–683]; Australian Competition and Consumer Commission v Australian Safeway Stores (1998) 81 FCR 526 at ).
It was further observed that a belief litigation would eventuate did not have to be absolutely certain in the mind of a reasonable person in the position of the relevant solicitor, but there should be a reasonable probability or likelihood that proceedings will commence (at ; Australian Safeway Stores (1998) 81 FCR 526 at ).
The court further reiterated that for legal professional privilege to attach, the creation of the document(s) in question must have been for the dominant purpose of providing assistance or advice in relation to anticipated litigation, where dominant purpose is the "ruling, prevailing or most influential purpose" (at ; Mitsubishi Electric Pty Ltd v Victorian Workcover Authority (2002) 4 VR 332 at ).
The court noted that the documents will not be held to have been created with a "dominant purpose" if they were created for two or more purposes of equal significance (at ; Commissioner of Taxation (Cth) v Pratt Holdings Pty Ltd (2005) 225 ALR 266 at ).
Deliberate attempt by insurer's solicitors to attract legal professional privilege
The court stated that the wording of the correspondence between the insurer, the solicitors and the loss adjuster revealed a deliberate attempt by the solicitors for the insurer to attract legal professional privilege (at ).
His Honour however quoted Marks J in Protean (Holdings) Ltd v American Home Assurance Co Supreme Court Victoria, 5 September 1985 at p 6: "It is clear that a studious cast of verbiage cannot work the alchemy of transforming what would be otherwise unprivileged into privileged documents..." (at ) and thus stated that it was therefore necessary for the court to consider objectively whether the reports were privileged.
Real prospect of litigation
His Honour found that at the time the reports in question were being prepared there existed a real prospect of litigation, and that this was in the mind of the solicitors for the insurer at the relevant time. In drawing this conclusion, his Honour pointed to the catastrophic consequences of the flooding, particularly the highly likely possibility that the costs would exceed the policy limits (at ).
There was also a question of whether the levee bank was an insurable item under the policy, which would by itself increase the prospects of litigation significantly. This was shown to be an aspect in the mind of the solicitors for the insurer by way of a contemporaneous file note (at ).
The court was also satisfied that, upon reading the unredacted copies of the reports over which privilege was claimed, that they were prepared for the dominant purpose of providing advice in relation to litigation. This conclusion was made in light of references in the reports to various potential legal issues, as well as discussion between the solicitors for the insurer and the loss adjuster in respect of reasonableness of costs of dewatering the mine.
His Honour stated that despite this information being of interest to the insurer, the reports primarily provided the insurer's solicitors with information relevant to the potential litigation (at ).
When will legal professional privilege attach?
When considering whether legal professional privilege will apply to a report by a loss adjuster, the following is relevant:
- Whether the litigation was reasonably contemplated at the time the document was produced. A belief that litigation is absolutely certain is not necessary, but there needs to be a possibility or likelihood that such proceedings will commence.
- Whether the documents were prepared for the dominant purpose of providing advice or assistance in relation to anticipated proceedings. This purpose must be the "ruling, prevailing or most influential purpose", with no other purpose having equal significance.
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